Negotiating Equity Comp by “Minimum Value”

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“No risk, no reward. But much risk may yield no reward, too.”

– Common Sense

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ACTUAL CASE HISTORIES: Our client, an experienced CFO, was approached regarding a job opportunity she found intriguing. All indications were that her experience and expertise made her a great fit for the job. Not only did the position seem to represent a significant rung up on her “ladder to success,” but it seemed potentially lucrative as well. A detailed set of forecasts, projections and analyses prepared for investors indicated that her anticipated five-year equity compensation would in all likelihood be a true bonanza.

In her third meeting, when talk came to “cash” compensation, she was less than pleased; both base salary and targeted annual incentive were considerably below her expectations, as were benefits. But the equity valuation projections were extremely attractive. Could she rely on them? If she took the job as offered, she’d be doing just that. But did she have to take the job “as offered?”

We suggested she consider suggesting a “minimum value” approach in her equity compensation discussions. Simply put, if her equity-derived compensation did not achieve a “minimum annual value” either at set intervals or over her tenure, she would be entitled to a “minimum value” payment to make up at least some of the difference, representing a more balanced approach to allocation of risk.

She was skeptical. We were encouraging. With a few “bumps” here and there, the approach worked well, enabling her to take the opportunity with a significant mitigation of the downside risk on her most significant reward: her equity comp.

LESSON TO LEARN: With increasing frequency we notice employers offering less cash compensation in (a) set amounts, (b) without conditions, or (c) determinable by data application on objective metrics, and more non-cash compensation which is (i) subject to conditions, (ii) entirely or partially discretionary, and (iii) manipulable by Board, management or a committee decisions, (iv) without notice to the affected employees. For both reasons: greater risk of grave disappointment, at the very least.

Sure, stories abound of employees becoming wealthy beyond their dreams by equity, but few can live on the “stories” and “dreams” of others.

WHAT YOU CAN DO: Consider these six (6) thoughts:

1. Bear in mind that risk mitigation is the essence of business, and business includes employment compensation negotiation. Don’t be fearful of requesting consideration of risk mitigation in your equity compensation discussions. It’s akin to asking for an extended warranty when purchasing a new car. “Minimum value” approach is nothing other than that. If you are perceived as an especially valuable hire, you may be surprised at how well the concept may be received and responded to. It shows a bit of bravado, as well as an acute sense of sophistication.

2. Forecasts, projections and estimates of future company performance are little more than sales and marketing tools and cannot be relied upon by employees. Employers and those marketing their shares often prepare forecasts, projections and estimates of future company performance for potential investors, lenders or acquirers. Each page includes at least one warning that they are for discussion only, and should not be relied upon to avoid later legal liability.

These same forecasts, projections and estimates often find their way to Executive Recruiters, and then on to job candidates and employees – but without those protective warnings. We view the use of the best available measure for employees to be the “minimum value” approach.

3. Equity Plans and Award Agreements are always expressly subject to future modification by the company’s management, without notice, limit or regard for how they affect Plan Participants. With very few exceptions, employee equity awards are governed by three documents. (i) First, the “Plan” which is a set of rules for how the handling of equity. These rules are subject to unlimited discretion and latitude. (ii) Second, the “Award Agreement” is a set of terms and conditions of agreed to by employer and employee; however, since they are subject to changes in the Plan, only the employer can, in effect, change the “agreement.” (iii) Third, the company’s “Operating Agreement,” (or shareholder, LLC, Investor agreement) governs the overall distribution of equity shares, classes and dividends, interests and priorities, effectively overarching all other documents.

Like it or not, the Award Agreement is subject to the Plan, and the Plan is subject to the Operating Agreement. The net effect: your Award Agreement is open to modifications (a) without notice to you, (b) against your interests, (c) without limitation, and (d) without redress of grievance. And, who makes the decisions regarding modifications? Almost always the investors/owners, whose interests are surely not entirely aligned with yours.

4. There’s little if any downside in asking consideration of “Minimum Value” treatment so long as your request incorporates “The Three R’s of Requests.” They are (1) submission with Respect, (2) their size or amount are Reasonable, and most importantly it is accompanied by (3) a convincing Rationale. The rationale of “shared risk” is – or should be to any investor or employer – entirely convincing, as it is “borrowed” from their own value-set.

5. In any negotiation, it’s not what you say “at the table,” but what you bring to it, that is the best indicator of likely success at the negotiation table. People often think that there are “tricks” to negotiation. While there are some who are more comfortable with the process, and some who can turn around arguments “on a dime,” and others, too, who seem expert at it, the simple, bottom-line truth is that negotiation starts, and ends, with what you have to offer. The fact that they have “come to the table,” proves that. Keep that in mind.

And bear in mind, too, that you can learn oh-so-much about potential employers, business partners, co-venturers, clients and others by negotiating with them. In fact, the true nature of those you negotiate with – or at least try to negotiate with – is often revealed in the process.

6. If you are uncertain or uncomfortable with any aspect of the equity compensation negotiation process, we are here to assist. Over the many years of our experience in executive negotiation practice, many of our clients have used this approach, tailored to their unique set of facts and circumstances. We can assist you in this process. Of course, nothing is “guaranteed,” other than the simple notion, “If you don’t ask, you won’t get, at work.”

In Summary . . .

“Cash in the pocket is worth a lot.” Non-cash compensation can be worth a lot, too, BUT it can also be worthless or nearly so, and it is this potential downside that we suggest you seek to mitigate. The “Minimum Value” approach is the way many of our clients have been successful in this endeavor. The stories of employees who amassed great wealth by means of equity compensation are legion, but those who ended up working for years to make others – and not themselves – wealthy are less often spoken about. Asking for mitigation of downside risk in equity compensation should not be a stressful experience, but rather one of common experience and practice.

And Please Note that . . . We are With You

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Al Sklover


P.S.: If you would like to speak directly with us about this or other subjects, we are available for 60-minute or 120-minute telephone consultations, just [click here.] Evenings and weekends can often be accommodated.

SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Negotiation and navigation of work and career issues requires that you think “out of the box,” and build value and avoid risks at every point in your career. We strive to help you understand what is commonly before you – traps and pitfalls, included – and to avoid the likely bumps in the road. Requesting risk mitigation in equity compensation discussions is one way to do that.

Always be proactive. Always be creative. Always be persistent. Always be vigilant. And always do what you can to achieve for yourself, your family, and your career. Take all available steps to increase and secure employment “rewards” and eliminate or reduce employment “risks.” That’s what SkloverWorkingWisdom™ is all about.

*A note about our Actual Case Histories: In order to preserve client confidences, and protect client identities, we alter certain facts, including the name, age, gender, position, date, geographical location, and industry of our clients. The essential facts, the point illustrated and the lesson to be learned, remain actual.

Please Note: This Email Newsletter is not legal advice, but only an effort to provide generalized information about important topics related to employment and the law. Legal advice can only be rendered after formal retention of counsel and must take into account the facts and circumstances of a particular case. Those in need of legal advice, counsel or representation should retain competent legal counsel licensed to practice law in their locale.

Sklover Working Wisdom™ is a trademarked newsletter publication of Alan L. Sklover, of Sklover & Company, LLC, a law firm dedicated to the counsel and representation of employees in matters of their employment, compensation and severance. Nothing expressed in this material constitutes legal advice. Please note that Mr. Sklover is admitted to practice in the State of New York, only. When assisting clients in other jurisdictions, he retains the assistance of local counsel and/or obtains permission of local Courts to appear. Results obtained by some clients have no bearing on results obtained by other clients. Copying, use and/or reproduction of this material in any form or media without prior written permission is strictly prohibited. All rights reserved. For further information, contact Sklover & Company, LLC, 45 Rockefeller Plaza, Suite 2000, New York, New York 10111 (212) 757-5000.

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